Biz Break: Netflix falls, but can Amazon take advantage?

Today: Wall Street punishes Netflix (NFLX) for its projected earnings in fourth quarter of 2011 and beyond, sending its shares to historic fall. Also: Amazon's earnings disappoint Wall Street as it invests in new Kindles, and stocks tumble across the board.

Netflix stock falls 35 percent after earnings report

The fall from grace for Netflix, which started when the Los Gatos subscription-video service increased rates in July, may have reached rock bottom with a gargantuan loss on the stock market Tuesday.

Netflix stock fell to $77.37, a loss of $41.47, or 34.9 percent, after the company reported Monday that it had lost 800,000 subscribers in three months following a series of missteps that left customers enraged. Before Netflix split its DVD-by-mail service from its streaming-video product and began charging for the two offerings separately, its stock had traded at more than $300; on Tuesday, the stock slid below $80, hitting its lowest point since April 2010 and suffering its largest intraday percentage drop since October 2004.

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Analysts had expected Netflix to lose about 780,000 subscribers, Bloomberg News reported, so the bigger problem for Netflix on Wall Street is likely their projections for the future. While third-quarter earnings surpassed projections, the company announced that it expects to earn $19 million to $37 million, or 36 cents to 70 cents a share, on sales ranging from $841 million to $875 million during the all-important holiday season. Wall Street analysts had previously forecast earnings for the fourth quarter of $1.08 a share on sales of $919.57 million. In addition, Netflix reported that it expects to stop being profitable for a time starting next year as it pours money into international expansion and streaming deals.

"Looks like the nuclear winter scenario is playing out for Netflix. Subscriber-base expansion in the U.S. appears to be minimal and losses from international launches are weighing on profitability," Susquehanna Financial said in a note, according to the Wall Street Journal.

Susquehanna was one of many to cut its rating of Netflix after the earnings announcement, along with Citi analyst Mark Mahaney, Wedbush analyst Michael Pachter, Janney Capital and Goldman Sachs. Some analysts did see a bargain in the newly deflated stock, however, including Barclay's Capital and Oppenheimer, which noted that "Netflix's worse than expected 4Q guidance should mark the end of this ugly episode."

Amazon reports disappointing earnings as it invests in Kindles

One of the companies seeking to capitalize on Netflix's descent is Amazon, which has been beefing up the streaming service that is packaged with its Amazon Prime yearly preferred-customer subscription program. But Amazon's earnings report Tuesday didn't do it any favors, either.

The Seattle-based online retailer announced sales and profits that fell short of analysts' projections and, more importantly, said it may post a loss in the fourth quarter, which includes the usually robust holiday season.

The third-quarter downturn and projected losses are most likely due to Amazon's introduction of new Kindles, which the company sells at a reduced price in order to line up the customers to pay for content from the company. The company has also been spending money to sign deals for streaming content, which they can then pipe through the new Kindle Fire, a full-color tablet computer that will hit the market next month.

"This is really a volume game for them," Kerry Rice, an analyst at Needham & Co., told Bloomberg. "They've had to continue to invest, which is good because that shows demand. But it does depress earnings at times."

Those depressed earnings were enough for investors to sell off Amazon's stock at a near-Netflixian clip after the report. Shares were down 4.4 percent in regular trading, but plummeted an extra 14.3 percent by 1:30 p.m. PDT, only a half-hour after the market closed and Amazon reported its numbers. The stock was down to $195.10, a loss of $32.05 in after-hours trading.

3M posted less-than-stellar earnings Tuesday, helping to drag the Dow Jones industrial average down 1.7 percent, and the Standard & Poor's 500 index declined 2 percent as concerns about Europe continued to weigh on investors.

But it was the Nasdaq that fell the farthest of the three indexes on the day, 2.3 percent, as many stocks that shot up Monday came back to earth. After a big jump Monday, San Jose solar manufacturer SunPower (SPWRA) decreased by 9.5 percent. The entire solar-power sector was hurt in Tuesday's trading, as the nation's largest solar company, First Solar, jettisoned its CEO and took a hit of more than 25 percent to its stock price. Mountain View-based social network LinkedIn, which also enjoyed a healthy bump in share prices Monday, was slapped back down with a loss of 6 percent.

And the widely watched Standard & Poor's 500 index: Down 25.14, or 2 percent, to 1,229.05

Check in weekday afternoons for the 60-Second Business Break, a summary of news from Mercury News staff writers, the Associated Press, Bloomberg News and other wire services. Contact Jeremy C. Owens at 408-920-5876; follow him at Twitter.com/mercbizbreak.